Dollar tops one-year high against euro

Investors ponder outlook for European interest rates

By

WilliamL. Watts

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar slipped against the yen Thursday as risk appetite waned, but traded at its highest level against the euro in more than a year after the European Central bank held rates steady and implied it was open to easing.

Expectations for a softer tone have kept pressure on the euro, analysts said, which traded at a more than one-year low of $1.3746 against the dollar before trimming losses to change hands at $1.3796.

The single currency was at $1.4021 in late North American trading Wednesday.

The dollar index
DXY, -0.27%
which measures the U.S. unit against a trade-weighted basket of six major currencies, rose to 80.535 from 79.353 late Wednesday.

The dollar slipped against the Japanese currency in line with rising risk aversion, as U.S. stocks withered and closed with steep losses Thursday. See Market Snapshot.

The dollar bought 105.14 yen, down from 105.74 yen late Wednesday.

The Japanese unit also gained on the euro, which slumped to a more than two-year low of 144.83 yen. The euro was last down 2% at 145.05 yen.

ECB President Jean-Claude Trichet said there are still upside risks to price stability, although they have "alleviated somewhat."

"An important remark by Trichet indicating that the central bank 'regained control' in shaping inflationary expectations, which may be interpreted as a victory on the inflation front, allowing the central bank to move forward in dealing with growth risks," Ashraf Laidi, chief foreign exchange strategist CMC Markets US, wrote in a note to clients Thursday.

Economists had overwhelmingly expected the ECB to leave its key lending rate unchanged at 4.25%. See full story.

"I guess the European Central Bank is tired. After pumping tens of billions of euros and dollars into its financial system over just the last two weeks, the ECB couldn't muster up enough energy to cut rates today," said Jack Crooks, president of Black Swan Capital, an independent currency advisory and trading firm.

"The euro is having trouble, as we expected it would. The question is no longer 'Can the euro go lower?' Instead, it's 'How much lower can the euro go?'" Crooks said.

Bailout vote, jobs data awaited

The U.S. Senate's passage Wednesday of its version of the $700 billion bank-bailout proposal also provided some support for the dollar, said strategists at Lloyds TSB.

Attention has now turned to the House of Representatives, which unexpectedly rejected a similar proposal earlier this week, and will vote on the new plan. See full story.

Adding further grist for currency traders, the Commerce Department said factory orders fell 4% in August, the most in two years. Read Economic Report.

The weekly figures came ahead of the government's closely-watched monthly jobs report, due out Friday. Economists surveyed by MarketWatch are forecasting that nonfarm payrolls shrank by 103,000 jobs in September.

Overall, the latest U.S. data covering activity in August and September make it all but certain that the academic economists will eventually declare that the economy is in a recession. See Capital Report.

Interest-rate futures traders raised bets the Federal Reserve will lower its benchmark borrowing rate by the end of the month.

Traders see a 98% chance that the Fed will reduce its target rate by as much as a half percentage point, from 2% currently, by its Oct. 29 meeting. This is up from a 66% probability on Wednesday.

Euro-zone worries

Worries over the European banking sector -- and the extent to which governments should get involved -- have also cast a shadow over the euro in recent sessions, analysts said.

With euro-zone inflation still running well above the ECB's 2% annual target, policy makers might maintain a hard line amid fears price pressures will feed through to the wage-setting process.

The demand by influential German trade union IG Metall for an 8% wage hike is likely to reinforce the Governing Council's worries about such "second-round effects," said Marcel Theliant, an economist at Credit Suisse in Zurich, who expects the ECB to begin cutting rates next year.

The British pound also lost ground against the dollar, falling to $1.7609 from $1.7693.

British house prices dropped a 1.7% on a monthly basis in September, for a record annual decline of 12.4% as tight credit conditions and an unsettled economic picture took a toll, mortgage lender Nationwide said Thursday. See full story.

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